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Famous Figures and Diagrams in Economics

Famous Figures and Diagrams in Economics

Edited by Mark Blaug and Peter Lloyd

This is a unique account of the role played by 58 figures and diagrams commonly used in economic theory. These cover a large part of mainstream economic analysis, both microeconomics and macroeconomics and also general equilibrium theory.

Chapter 50: The Phillips Curve

Richard G. Lipsey

Subjects: economics and finance, economic psychology, history of economic thought


Richard G. Lipsey Two distinct theories concerning the disequilibrium relation between the real variables of income and unemployment on the one hand and the money variables of wage rates and prices on the other hand have been around for a long time in the economics literature. In Theory 1, the causal relation runs from money to real variables: changes in the money price level and the money wage rate cause changes in income and unemployment. In Theory 2, the causal relation is reversed: changes in the real variables of income and unemployment cause changes in the money variables of prices and wage rates. The fact that these two theories have one implication in common, that there is a trade-off over some time period between unemployment and inflation, does not necessarily make them identical theories. In some versions, both relations are merely the dynamic and static versions of a single relation that links real and monetary variables. In other versions, however, the two are distinct relations, differing, for example, in the behaviour that underlies them and the policies that might shift them. The textbook short-run aggregate supply curve (SRAS) that relates the price level, P, to national income, Y, concerns Theory 1 (see Chapter 49). Theory 2 was given its modern form when A. W. Phillips (1958) reported finding a stable relation between the percentage of the labour force unem# ployed, U, and the rate of change of money wages, W, in the U.K. between 1861 and 1957; when Richard Lipsey...

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